Although the mainstream media tends to focus on natural gas and crude oil when discussing the energy sector, natural gas liquids (NGL) are an important, if often overlooked, part of North America’s energy landscape.
Processing plants extract NGLs from the gas stream, while fractionation facilities separate these hydrocarbons into discrete components for their various end-markets.
Our table breaks down a typical US barrel of NGLs, each component’s contribution to the overall price and their primary applications.
Despite their esoteric nature, NGLs have played an important role in the US shale oil and gas revolution.
After surging domestic output of natural gas weighed on the commodity’s price after the Great Recession, upstream operators shifted their drilling activity to “wet” plays that also produced significant volumes of higher-value NGLs that enhanced wellhead economics.
The price of a mixed barrel of NGLs, some of which can replace naphtha and other oil derivatives in industrial and petrochemical processes, historically has tracked movements in the price of crude oil.
However, surging NGL production from prolific shale oil and gas fields swamped the domestic market and sent prices tumbling in early 2012. Oil prices, on the other hand, continued to hover around $100 per barrel until growing US output and declining imports catalyzed a precipitous selloff that began in summer 2014.
This downswing in West Texas Intermediate (WTI) also hit NGLs and restored the traditional price relationship between crude and natural gas liquids. To this end, the recent rally in oil prices likely accounts for much of the recovery in NGL prices since the end of the third quarter.
US NGL output has increased at a steady pace since prices first tumbled in early 2012, though monthly production declined negligibly (about 0.5 percent) on a year-over-year basis in August and September 2016.
Although the Energy Information Administration’s Short-Term Energy Outlook estimates that growth in US NGL output slowed to 4.2 percent last year, this forecast calls for production to surge by about 12 percent in 2017.
This strength stands in sharp contrast to the Energy Information Administration’s projection for US oil production to slide again in 2017. (We expect actual output to surprise to the upside.) The report also calls for US natural-gas volumes to tick up by about 3 percent after suffering their first annual decline in 2016.
The rise in oil and gas prices, coupled with accelerating drilling and completion activity in US onshore plays, will contribute to some of the outsized growth in NGL production.
But other factors are at work and should drive additional output gains in 2018 and 2019, especially for ethane, the most abundant NGL by volume. These forces could also create the potential for a temporary uptick in ethane prices in coming years, a development that would elicit a supply response from US upstream operators.
Eye on Ethane
Your complete guide to energy investing, from growth stocks to high-yielders.
In October 2012, renowned energy expert Elliott Gue launched the Energy & Income Advisor, a twice-monthly investment advisory that's dedicated to unearthing the most profitable opportunities in the sector, from growth stocks to high-yielding utilities, royalty trusts and master limited partnerships.
Elliott and Roger on Nov. 26, 2019
Balanced portfolios of energy stocks for aggressive and conservative investors.
Our take on more than 50 energy-related equities, from upstream to downstream and everything in between.
Our assessment of every energy-related master limited partnership.
Roger Conrad’s coverage of more than 70 dividend-paying energy names.